Plantronics Inc F3Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (PLT)

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Plantronics Inc. (NYSE:PLT)

Q3 2006 Earnings Conference Call

January 24th 2006, 2:00 PM.

Executives

Jon Alvarado, Treasurer and Director of Investor Relations

Ken Kannappan, President and Chief Executive Officer

Barbara Scherer, Chief Financial Officer

Analysts

John Bright, Avondale Partners

Reik Read, Robert W. Baird & Company

Jason Ader, Thomas Weisel

Paul Coster, JP Morgan

Operator

Good afternoon my name is Ved and I will be your conference operator today. At this time I’d like to welcome everyone to the Plantronics Third Quarter Fiscal Year 2006 Conference Call. All lines have been on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press “*” then the “1” on your telephone keypad. If you would like to withdraw your question, press the “#”key. Thank you. I’ll now turn the call over to President and CEO of Plantronics, Mr. Ken Kannappan. Sir, please go ahead.

Ken Kannappan, President and Chief Executive Officer

Thank you Ved. Good afternoon and thank you all for attending our conference call. On the line with me is Barbara Scherer, our Chief Financial Officer; and Jon Alvarado, our Treasurer and Director of Investor Relations, as well as other members of our finance in IR team. The agenda we will follow today is that I’ll give you a quick synopsis of our results, which you all should have received by now and a business overview and update. Now I’ll turn this call the over to Barbara to go through the financial results in more detail, and following that portion of the call we will open up for questions and answers.

I want to remind you during this conference call, we may make certain forward-looking statements that are subject to risk and uncertainties, specific forward-looking statements include our outlook for revenues, gross margin, operating margin and earnings for the fourth quarter of fiscal 2006. There are important factors that could cause the actual results to differ materially from those anticipated by any such statement, including fluctuations in demand for our products, the related revenues earnings and cash-flow consequences, or such fluctuations. The market price of our common stock did fluctuate substantially these results and other unforeseen factors. For further information, please refer to company’s Form 10-K, 10-Q, Annual Report, recent press releases and other SEC filings. As I’ve highlighted before, the risk factors discussion in these filings are not standard at all times. We update these risk factors every quarter adding and dropping language and changing order depending upon the timing and differential impact to be concerned that we foresee.

The benefits of freedom and mobility continue to be validated. The revenue growth we achieved in the December quarter demonstrates the growth opportunities in our markets. In particular, our No.1 business priority is the growth of our office voice communications business. We achieved 20% sequential and over a 100% year-over-year growth in our Wireless Office product. A number of initiatives contributed to this continued growth and success from the Office Wireless product. We had a full contribution from our new Voyager 510S office system, the first which allows easy conversations coming back and forth your desk phone and your mobile phone.

We had some successful European market efforts and of course we had the impact from our US branding and advertising campaign. We are still testing the effect of our national marketing campaign, we do believe that’s added to our revenue growth and that it increased category awareness and consideration to purchase Plantronics. We also believe that we should be able to improve the effectiveness of this campaign going forward. Our current intentions are to continue with our strong marketing program focused on Office Wireless throughout fiscal 2007. So that we do not achieve the returns we are hoping for we could modify that plan.

Consumer interest in our markets continue to expand as we saw strong increases in market demand the Bluetooth Mobile Headset, consumer VoIP headset and audio accessories for the iPod. The general tone of CES was very positive with retailers planning the both a greater portion of their marketing efforts and planning ramps towards technology and accessories that provide a complete solution to their customers. This opportunity is clearly exciting to our competitors as well, and we believe we are facing significant competition, price, product innovation and marketing. Our new Bluetooth products represented substantial improvement in product design, up through the continuation of our reputation for high quality sound and we won innovation awards for all three products with this forum also winning innovation awards from CES of the Discovery feed of over 2000 products from 37 countries win the very prestigious Industry Forum or iF Design Awards in the TV telecom segment.

Our new consumer VoIP headset with that Audio 450 also won an award at CES, this is the newest number of our Office Wireless lineup, the CS55 and we had a very favorable reaction of these products.

The Audio entertainment business had a very strong December quarter behind the unexpected strength of over 40 million Apple iPod sold in that quarter, lifting AEG revenue to about 40 million in the portable speaker category of 61 million in total. Altec Lansing also had two new products nominated for CES best of innovation awards the XT2 and the iMT1. Against the backdrop of terrific growth opportunities across our business and rising competitive threats; we have to improve our execution if we are going to increase our commercial market share and our profitability. In particular, we believe our manufacturing cost, supply chain and marketing receptiveness with great opportunities, more improvement in the under labeled efforts in these areas. With that, let me turn it over Barbara to go through the numbers and our outlook for Q4.

Barbara Scherer, Chief Financial Officer

Thanks Ken. We’re pleased to report record revenues both in total and for each of our segment in comparison to the third quarter a year ago, revenues were up approximately 72 million with 11 million of that coming from the Audio Communications Group, and 51 million from the Audio Entertainment Group. The Audio Communications Group grew 11 million or 7% to a record 161.5 million. This segment essentially represents the historical Plantronics businesses and its growth came from our Wireless Office and Bluetooth Mobile Headset, partially offset by lower revenues from gaming and corded mobile headset.

Wireless Office Headsets represented about 25% of segment revenue about 40 million, in comparison to just under 13% or 19.2 million a year ago. Revenues from headsets produced with mobile phones were down 15% in comparison to the year-ago quarter, due to a decline in corded headset, mostly but not entirely offset by an increase in revenues from our Bluetooth Headset. Revenues from Bluetooth products were approximately 50% in comparison to the year-ago, as a result of the Suite, which began shipping in the September quarter. The year-over-year decrease of our computer and gaming product was predominantly driven by shipments of our Halo 2 edition of the GameCom headset for the Xbox headset not repeated this year.

Within the ACG segment, international revenues increase 27% in comparison to a 3% decline domestically. Both the EMEA and APAC regions were up sharply with growth in nearly all product categories that the Wireless Office and Bluetooth Mobile Headsets markets were particularly strong. The domestic decline was the result of the gaming revenues being sharply lower than a year ago.

As the result of the for billing domestic revenues represented 61% of the total within ACG in comparison to 67% a year ago. The Audio Entertainment Group, which essentially represents the acquired Altec Lansing business achieved record revenues of 61 million. Within this segment, the portable category defined as our speakers that work with portable digital players, for example, iPod or mp3 players, amounted to 40 million or about 65% of the total. The other major product categories within AEG today are the powered category, defined as speaker systems used for computer and other multimedia application systems, headphones and headsets for use with PC. Those are the groups make up the bulk of the remaining 35% of revenues within that segment. Geographically, about 73%of AEG revenues were domestic and 27% were international. Sequentially, consolidated quarterly revenues increased by approximately 50.3 million, with about 39 million of that growth coming from AEG. Please note that Q3 represented the fourth quarter for AEG in comparison to about a half quarter in September.

Within ACG, revenues increased by 11.2 million or about 7 % with nearly all the net growth coming from Wireless either for the office or for Mobile Bluetooth products offset by continuing decline in mobile quoted revenues. And revenues from our professional great corded headsets were also up 1.5%. Our sell-through stacking of the US commercial distribution channel for the communication segment indicates that sell-through increased approximately 26% versus a year ago quarter and was up by approximately 4% sequentially.

The point of sale data we received from our US commercial distributors also indicate a record sell-through for the quarter as a whole. And please remember that this sell-through data that I am talking about here is just a portion of distribution revenue within the communications group, its US-based and that channel in total represents about 28% of the ACG segment revenue.

Turning to gross margin, on a blended basis gross margins were 42.3% in the quarter with the Communications Group at 46.4% and Entertainment at 31.3%. Gross margins in the Entertainment Group were negatively affected by 3.3 million of non-cash purchase accounting related charges that positively impacted by operating leverage on strong revenue and a favorable produce mix. Within the ACG, gross margin of 46.4% compared to 50.1% a year ago. Relative to the year ago quarter, the principal reason for the decline was higher manufacturing costs, in part the result of expanding capacity for anticipated future growth and in part the result of yield and unit cost on new products not yet at target level. Higher warranty cost and a larger provision for potentially excess in obviously inventory were the other key factors for the decline relative to the year ago quarter. Sequentially, within ACG gross margin improved by 9/10ths of a point from 45.5% to 46.4%, relative to the September quarter warranty cost was stable, requirements for E&O were substantially lower, yields were higher and manufacturing costs were lower.

On operating expenses compared to the year ago quarter, OpEx was up 15.5 million with 10 million of that being the operating expenses associated with the Entertainment Group. The rest of the 5.5 million in OpEx growth was attributed first to the advertising expenses, which were 3.3 million and $2 million to fund the higher level of investment in our new product pipeline, especially for Wireless product and the growth of our offshore design centers in Mexico and China. Within the Entertainment Group, the quarter-over-quarter increase in operating expense reflects a full quarter’s results consistently half quarter result in Q2. And of the 10 million in operating expenses approximately 0.9 million of that expense was purchase accounting-related and SG&A, and 2 million to ongoing Research and Development work on new products.

Turning now to operating margins, consolidated operating margins were 15.7%, 16% to the Communication segment and 15% for the Entertainment Group. Without the purchasing accounting charges the Entertainment Group’s operating margin would have been 21.9%, which would have been a very strong result helped by the operating leverage and the seasonally strong December quarter. Please note however that the amortization of intangibles assets acquired which were accounted for in cost of revenues and in SG&A expense will continue for many years and are expected to run about 1.8 million per quarter with about 1 million heading cost of revenues and 800k in SG&A.

And below the operating margin line we had 0.6 million of other expense, down from the prior year ago quarter income of 2.1 million primarily due to FX losses in comparison to FX gains in the year ago, owing to the rates decline and decreased interest income due to lower levels of cash to invest.

Our consolidated effective tax rate for the quarter was 35.9% compared to 35% in the September quarter and 28% in the year ago quarter with the Communications Group at 27% versus 28% a year ago. The acquisition of Altec Lansing had a significant impact on our consolidated effective tax rate increasing up to 35.9% for the quarter and 32.6% for the nine-months ended December 31. This is due to the impact of the non-deductible expenses of purchase accounting and the higher underlying effective rate of approximately 41% for the Altec Lansing subsidiary.

We currently expect the tax rate for the Communication portion of the business to come in at about 27% for the year. And that the underlying effective rate for the Entertainment business to be at about 41%, and over the actual GAAP tax rate for AEG will continue to be much higher because of the ongoing purchase accounting charges of approximately 1.8 million are not deductible for tax purposes.

And our tax rate can also be affected by the mix of profits geographically. And a result of all above, our consolidated net income for the quarter was $22 million or 9.9% of revenues compared to net income of 24.4 million or 16.2% of revenues a year ago, with consolidated EPS of 46 versus 48.

In terms of business outlook, our guidance for the fourth quarter is a revenue range of 200 million to 210 million, an EPS of $0.39 to $0.44 on a GAAP basis. Included in these estimates is our expectation, as mentioned that we will incur a further 1.8 million in purchase accounting charges. We are expecting revenues from AEG to decline, generally consistent with historic seasonal trends and for the ACG business, the communication business to grow modestly primarily due to anticipated growth in Office Wireless.

Although we have not completed a full financial analysis of the national branding and advertising campaign, we feel we have sufficient information to conclude that it is appropriate to continue the campaign although at a reduced spin level during the fourth quarter, and help maintain the increases we’ve seen in awareness consideration in revenue growth. For the fourth quarter, we are targeting an investment level of approximately 10 million. While we are evaluating all the results, we are planning how best to address demand generation for Office Wireless products for fiscal 2007 and as Ken mentioned, we do expect to continue to invest in branding advertising and demand generation for this category next fiscal year.

When turning to the balance sheet, cash and marketable securities decreased by 33 million during the quarter to 58.2 million from 91.2 million at the end of September. The decrease was primarily the result of 22.4 million used for stock repurchases, 9 million pay down on our line-of-credit, 9 million in capital expenditures and dividends issued of 2.4 million. Offsetting these primary uses of cash during the quarter, we generated 8.5 million in cash flow from operation and 1.7 million in proceeds from the exercise of stock option.

Overall, we believe our financial position remains strong and in that context our Board of Directors declared our 7th quarterly dividend in the amount of $0.05 per share. Our accounts receivable balance increased sequentially from a 115.1 million to 126.2 million with the Communications Group receivables remaining relatively flat for the record cash collections in the quarter, while the Entertainment Group increased by about 11 million due the higher quarterly revenues, which is typical for this business during that December quarter.

Our DSO decreased to 51 days from 60 in the September quarter and part of this decrease is due to having the fourth quarter results of Altec versus with the half quarter in September. We certainly believe the net receivable balance is collectable and that we have sufficient reserves to cover our exposure, anticipated exposure to bad debt.

On inventory compared to the prior year, inventories were up 7.4 million and inventory turns increased from 4 to 4.8. This improvement in terms is primarily attributable to fourth quarter results of Altec Lansing, increased sales volume during the holiday season causing a reduction to Altec Lansing inventory, as it goes up in September, and it was offset by an increase in the Communications Group inventory.

And finally, capital spending was 9 million in the quarter, with 2.7 million of that for our China plant, and depreciation and amortization were 6.8 million for the quarter. Our project to-date we’ve spent 17.2 million on our China plant and design center and we have just taken the keys to the plant. After the Chinese New Year holidays are over, we intend to move in and begin production shortly thereafter. The plant was completed on schedule and within budget and we look forward to starting production there.

And we also look forward to beginning to make progress for getting the plant loaded and towards our long-term goals of low-end cost and improving our supply chain, even flexibility. With that, I want to turn it back over to Ved, the conference facilitator for the Q&A session.

Question-and-Answer Session

Operator

At this time I would like to remind everyone in order to ask a question please press “*” then the “1” on your telephone keypad. We will pause for just a moment to compile the Q&A rooster.

Your first question comes from John Bright with Avondale Partners.

A - Ken Kannappan

Hi, John.

Q - John Bright

Thank you. Hi, first on the out performance on the office side of the equation, you’ve mentioned that the marketing campaign contribute to that, any quantification of that?

A - Ken Kannappan

We have tried extremely hard John well, we look at all types of data and its very hard to sort out what exactly is due to the marketing campaign, the problem is when you have a new product as we gave with the price in there, it makes sense to use that as part of the whole announcement to have a new product, we have marketing messages and its very hard to distinguish exactly what is coming from what source. In addition we had, there is a lot things that we look at and when we really try to segment out its just really hard to tell, there is a lot of noise within the data and we don’t really have a good control as we’ve had in past experiment.

Q - John Bright

What was the annualized number for the CS50 and 60 headset?

A - Barbara V. Scherer

Well, including the 510 as there was 160 million, 40 million in the quarter.

Q - John Bright

Right, what sequential…

A - Barbara V. Scherer

The sequential growth was 20% in Office Wireless, that’s about $6 million of growth and within that growth the majority of the growth did come from the CS50 and the CS60, the 510 has contributed that’s the majority of the 6 million sequential growth was from the already existing products.

Q - John Bright

Regarding the gross margins within the Communications Group and as that relates to the China plant what are your thoughts on the operating expenses, that the additional operating expenses you are going to incur for the China plant as it ramps us and how do you categorize the potential, how much potential improvement is possible for those gross margins?

A - Barbara V. Scherer

Well, so over the long half first let me say that, I still feel reasonably comfortable with this target model we’ve had of 47% to 50% on the communication side of our business, it does obviously depend an awful lot on mixed and what happens in the Bluetooth market and how much of that we participate in, but overall, I still feel like I’ve got the right range. On China as we start to load the plant here, I think we are going to start turning the corner and see the impact of China going but there will be less of the drag on gross margin going forward and our goal is within the year to at least get that to a breakeven and then move from there.

Q - John Bright

And then stepping back to the marketing side of the campaign or side of the equation for 2000 or ’04 the fiscal year of ‘07, you are talking about moving forward continuing with that and adjusting as you go along, is that benchmark continue to use 10 million from marketing spend or is it 8 million, given the lower spend this upcoming quarter?

A - Ken Kannappan

Well we were using about $10 million over a six-month period. So it’s really a slightly higher run rate than what you’ve got anticipated in that comment.

Q - John Bright

Okay, thank you.

Operator

Your next question comes from the line of Reik Read with Robert W. Baird & Company.

Q - Reik Read

Hi, good afternoon, can you guys talk a little bit about on the Entertainment side with the great volume we had this quarter, the margins excluding the charge, kind of stayed up from a gross margin perspective as that volume drops back down, what will happen to the gross margins in the upcoming quarters?

A - Ken Kannappan

I will let Barbara speak to it in a minute, I mean it principally relates to the fixed cost benefits you get as the revenue ramps.

A - Barbara V. Scherer

Yeah, I mean, it’s true that we had the 3.3 million in cost of revenue this quarter and that will drop to about $1 million next quarter so that’s a good guide but we also expect the revenues to fall quite a bit and they do have fixed cost of a manufacturing plant and so that will move in the other direction. Our model for that business is 10% to 30% to 35% gross margin target, including the anticipated purchase accounting targets, I think they will probably stay in that, in that range.

Q - Reik Read

Okay and then on the Communication side, if you go back a quarter ago, you guys talked about some of the same issues in terms of adding capacity and yields and the warranty charges and so on and so forth. You saw a sequential improvement; can you talk a little bit about going forward? Are these same issues that you highlight? Do you see each of them getting better or there are some that will just potentially hang out there for a while? Can you just talk directionally about how you see those issues impacting the margins on the communications side?

A - Barbara V. Scherer

Yeah, I mean, the warranty costs as I said in September, they are about 2% of revenue and that is kind of a normal level, it was lower than that in September, a year ago and in December a year ago but September of this year and December of this year, it’s stabilized and I think we’ll probably, generally be in that 1.5% to 2% of revenue on warranty cost. So and then E&O just tends to fluctuate with market conditions. I do think as we ultimately reduced this improved supply chain flexibility and in more platforming, we can hopefully at least limit the growth in E&O and those things help but the big net is on manufacturing cost and there we certainly are working to reduce those and improve the cost position. The China plant is part of that but we do need to get that plant loaded and up in running and we also have some key opportunities on component costs that we are working as well.

Q - Reik Read

And Barbara as you said with the China facility, you’ve taken the keys to that now. Is that something that will probably be a little bit of drag on margins in the near-term or how should we think about the China plant as that ramps up?

A - Barbara Scherer

There will still be a little bit of drag on margins but I hope for that it is going to get to be, kind of less of a drag each quarter and so that we actually maybe talking in a year-over-year context of it being a favorable factor.

Q - Reik Read

Okay.

A - Barbara Scherer

Do you understand what I mean, because we’ve been in the startup on mode where there was really almost no absorption coming out of that, out of there, until as we move forward, I think its going to be, its going to be less and less and eventually get to our contributor.

Q - Reik Read

Okay and then just one final question from me, you guys given some consideration or can you give us some idea of what you think the options expense might be for fiscal ’07?

A - Barbara Scherer

We haven’t put that out yet, we have done a lot of work on it internally but we haven’t finished reviewing it with our auditors and with our Board and we certainly want to do that before we communicate externally.

Q - Reik Read

Okay great, thank you.

A - Barbara Scherer

Thanks.

A - Ken Kannappan

Thanks.

Operator

Your next question comes from the line of Jason Ader with Thomas Weisel.

A - Ken Kannappan

Hi, Jason.

Q - Jason Ader

Hi guys, how are you? Just a quick housekeeping question on the tax rate, where were we’ve been without the impact of the charges?

A - Barbara Scherer

We actually don’t have that handy, we haven’t done the non-GAAP version and I don’t really think that is, I mean, I don’t think that we need to do it.

Q - Jason Ader

Okay.

A - Barbara Scherer

I can, I can give some thinking about it, we can; we can talk about it.

Q - Jason Ader

I am just thinking of what a normalized rate would be, you know with the 1.8 millions going there that you have a couple of million out of there…

A - Barbara Scherer

So that would be, if we didn’t, if we didn’t have any purchase accounting and we will have that one for a long time, its 27% on the Communication side and 41% on the Entertainment side so if you just blend.

Q - Jason Ader

Okay.

A - Barbara Scherer

In terms on that, you know on that basis you would get there.

Q - Jason Ader

And I’m trying to figure out what the non-GAAP EPS would have been for the quarter, kind of assuming that those charges, the purchase accounting charges weren’t there.

A - Barbara Scherer

It would be about $0.08 higher.

Q - Jason Ader

$0.08 higher, okay, that’s all fine. Alright and the gross margin outlook for the March quarter, I would assume that the blended margin should be better in the March quarter only because we have a higher mix of the ACG which should have a strong quarter whereas AEG should have a weak quarter, am I missing anything there, is there any impacts on mobile, negative or positive?

A - Barbara Scherer

No you’re not, you’re not missing anything there, but we are not giving guidance specifically on the gross margin because of the directional factors.

A - Ken Kannappan

In other words, the only thing that goes negative obviously is that our volume improves gross margin and this is lower volume.

Q - Jason Ader

Right, right, okay and then we, I guess the questions for the results for the December quarter and then Ken, you could speak for this, what kind of surprise you guided, what I thought was fairly conservative and I kind it kind of beat you guys up last time. And I feel somewhat vindicated, but Ken maybe you could comment on what the price it should be upside the most?

A - Ken Kannappan

Yeah, many people are more right about our business than ourselves so I am, but I congratulate you for that. You know couple of things, on the office side obviously, we did not know exactly what to expect, I think there were a couple of things made the pattern interesting. One was that we had it usually, with July and the September quarter and then it was kind of finished with a particularly strong September and so given that unusual pattern, it also made it hard to understand what we were going to see during the balance of the quarter. We are also dealing with some benefit in the business from Hurricane Katrina that were hard to measuring the steps. So that those were couple of things and of course we didn’t know exactly how much impact to expect from the marketing campaign, those were few of the variables instruct me the significant from that side of business. On the AEG side, I think actually everybody was surprised with the share number of iPods were actually sold, 40 million was ahead of the estimates that we have, in addition to which the nano had come out as a slight surprise with the heavy black to white colored preference and everyone now just does had white products with a slightly different size form factor then there was kind of the issue at the back, backwards and how that reflects the tax rate. So, those things went up going a little better than we had expected across the Board, but those are kind of some of the issues.

Q - Jason Ader

In the mobile business; is that roughly inline with expectations?

A - Ken Kannappan

Well, we have a little bit better success particularly with the discovery of products than we had expected, it’s a slightly higher priced product then it’s sort of being in terms of being in design statement in that market and so we weren’t we always do a little bit of market research with the elasticity of demand, but I think that the design in that was very captivating the customers and the sell-through level went a little bit better than we hoped. And I would say also that the category as a whole was stronger than we would expect that it would be, be embracing with Bluetooth in some of the newer markets and some of the – and some of the promotions buying the phone were all a little bit stronger than it has been expected.

Q - Jason Ader

So would you expect some seasonality in the mobile business in the March quarter, I know historically you’ve had seasonality but you do have these new products, what could you tell us I know you didn’t give segment guidance but what’s your general on the March quarter more seasonal in with mobile?

A - Ken Kannappan

Well, first as you note, we are beginning, we have been particularly good at forecasting the business, and I don’t know that we will right now. I think that there is seasonality to the mobile business, but it is not as seasonal to be sure as the Entertainment business and yes, there is, there is certainly some lift there, we are still hoping that Bluetooth is rolling out some of those products but at the same time the sustained fund, we would also acknowledge that one of the things we saw was, that even though our products were kind of, I think widely viewed as being the best-designed products in the industry and was the best performance in many respects in terms of audio quality and reliability, there’s a lot of people out there you know with the hope in grabbling business with bundling, and with significant cash offers and that makes forecasting the business much more volatile in this quarter. So I expect, a smaller seasonal effect in the March quarter, but you still have some seasonal effect.

Q - Jason Ader

Hey last question, just on the mobile gross margins, Barbara I know I don’t break that out, but could you at least give us some sense of, how they did sequentially just on that particular segment, and how we should be thinking about your mobile gross margins I know historically they were in the 35% to 40% quoted and with Bluetooth, obviously they are lot lower, but could you give us at least some direction there or some help?

A - Barbara Scherer

Alright, well so they are lot lower than where they were unquoted, when there was decent blend of retailing career but the good news is, I think what I’ll say is that, margins improved sequentially and, the products, they’re certainly profitability at the gross margin levels so that, that’s a good stuff in the right direction.

Q - Jason Ader

Okay thanks very much.

A - Barbara Scherer

Okay.

Operator

Your next question comes from the line of Paul Coster with JP Morgan

Q - Paul Coster

Thank you, good afternoon, I’m just wondering if we can focus it on the AEG business for a moment, so I got a few questions. First is, Bob you talked of mobile seasonality on a sequential decline going in from March quarter, can you share with us what the sequential decline was last year and just I’d say good comparison anyway given the growth of the category?

A - Barbara Scherer

I think Ken wants to address this one.

A - Ken Kannappan

Sure. We’ve been looking at their quarterly patterns and to be sure, you know there’s always changing environment, changing environments but in fact, it looks to us like the patterns have been fairly consistent as it have been induced from a consumer side until we do actually think that a typical December to March quarter seasonality effect is appropriate. And bear in mind, that that although the, in the analysis much of what we’ve seen at a year ago with the earlier stage of iPod growth still representing, a good secular trend, overlaying the seasonal effect.

Q - Paul Coster

Can you share with us the actual percentage sequential decline last year or…

A - Ken Kannappan

Well I could, but I don’t think I am going to, because I don’t think we’ve publicly disseminated that.

Q - Paul Coster

Right. Can we assume that this is a 20% plus growth category at the moment, year-on-year.

A - Barbara Scherer

Well, let see…

Q - Paul Coster

On a going forward basis.

A - Barbara Scherer

The power for, is really quite flat. Maybe just fairly, up and then the portable part is, foreign excessive 20%.

A - Ken Kannappan

Yeah.

A - Barbara Scherer

I don’t want to blend out, if I does get to that or better.

Q - Paul Coster

Okay, and can you talk just little bit about your tax rate for the category. I mean, 14 million iPods, do you have a sense of how many of those iPods are actually attached to these devices. What share of the market you might have, and whether or not it’s a concurrent purchase or lacking purchase obviously that might, mitigate this seasonality a bit.

A - Ken Kannappan

We do have some of that in information, but not all of it. And, but the nice thing is that there has been a significant portion of people who do accessorize their iPod. The Altec is not the #1 player in this category; when we are talking about specifically accessorize and with respect to speakers. But having said that is amongst the market leaders with around of 20% to 25% range of the business.

Q - Paul Coster

And do you get a sense of what the tax rate might be, for the iPod?

A - Ken Kannappan

Well I again, I do have some of that information but I don’t want to pass along for couple of reasons. First, not a 100%, sure that it’s going to be twice the same way that you’re going to be thinking about it, and so, I prefer not the answer, but we can come back to you on that later if you would like.

Q - Paul Coster

Sure got it, okay, and then last question is on the AEG side, do you offer price protection and as you think out that the business, is that factored in to your guidance, I am sure if it is this relevant.

A - Barbara Scherer

With respect to, basically sell all through, typical retail which does have price protection, but they really don’t lower, I mean, occasionally they do lower prices but, its not, its more like you bring out a new product out of a new price point. And so, with price protection, the way that works is when you make a decision that, you are revocable; then you must immediately record the estimated price protection. So, if they are thinking that they might get price pressure and need the lower prices. Then they would go about into their forecast that, you don’t want to actually take it, when you actually make a decision.

Q - Paul Coster

Got it, thank you very much.

Operator

Your next question comes from the line of Ed Lidman with William Blair.

Q - Ed Lidman

Good afternoon Ken and Barbara how are you?

A - Ken Kannappan

Ed, how are you?

Q - Ed Lidman

Ken last quarter, on the call of last quarter, you talked about seeing, potentially seeing some pricing pressure on the call center and office space and with 20% sequential growth, its certainly doesn’t appear that it showed up that this quarter, are you still concerned that there maybe some pricing pressure there?

A - Ken Kannappan

No. We are still concerned about that, I would have to say that perhaps in the December quarter, we didn’t see as much as we feared as we look out longer term, it is still a concern at a risk that we see in the business.

Q - Ed Lidman

Okay, and then also last time you talked, I think some of the Mexico manufacturing facility, was having some difficulties and you lost some sales, Bluetooth product sales. Looking back now is there a way you can quantify those sales?

A - Ken Kannappan

Not it’s a really, really hard to quantify that type of stuff, because what happens of course is first of all if you are late with the delivery, you missed a certain amount of sell-through and then replenishment activity and its hard to really know, what that was for that period of time. You know, we had difficulties with their yields and those have clearly improved and then we had difficulties with component shortages as we were trying to struggle to catch up with the quick demand. The overall manufacturing environment is clearly improved into our run rate at this point in time, reflect the end-market demand for business, obviously we are hoping to further to penetrate additional accounts by the end of the quarter, there was no limitations from standpoint of supply in terms of our gaining distribution.

Q - Ed Lidman

Sure, and then on the advertising campaign, just lastly, any potential plans there to maybe expand that to support maybe brand awareness on the consumer Bluetooth product or maybe even to the Altec Lansing brand name?

A - Ken Kannappan

Not in the significant manner and I will just give you our basic strategy which is that we are the market leader in the office of which communications accessory business and believe that there is a significant opportunity for a long-term adoption in that category and think that if we do not make the effort to promote adoption, that it probably won’t happen and so it’s really important to us to drive the industry growth. On the consumer sides of our business, we believe that there are lot significant market players with the enormous brand spending and follow it in consumer reach that are already setting those balls into play. And so, for us to try to make, a very small speak amongst the very loud roars of the elephants. I think would be, kind of lost in the noise, and so our primary strategy there is to compete successfully for market share and to try to be as profitable as we can, given again the price in economics of some of our competitors. Much of our focus there, to the extent we’ve spend marketing therefore is really around making sure that the value that we have to offer is clear to the consumer, because while again others may have larger brand names, we clearly have a better quality product. And that’s a hard message to get out and get through, but we are not reliant just on spending advertising. We can rely on better education; we can rely on better packaging, better point of sale materials, just a lot of ways to try to get that message across, without trying to spend the ad dollars against people with much larger budgets.

Q - Ed Lidman

Great, thank you.

Operator

Your next question comes from the line of Manny Recarey with Kaufman Brothers.

A - Barbara Scherer

Hi, Manny.

Q - Manny Recarey

Hi, congratulations on the good quarter.

A - Barbara Scherer

Thank you.

Q - Manny Recarey

Can you talk about the marketing campaign again, the I believe on the last conference call, Barb you spoke about $20 million I think with, much it was calendar ’06 or for fiscal ’07 and any idea how much you were anticipating spending? Would it be better to assume that, right now the outlook can spend less than that or?

A - Barbara Scherer

All right, so Manny that, there were I think 20 million for fiscal ’07 is kind of the right ball park number, I wouldn’t think of it just as advertising that is demand generation in a broad sense, including some branding and advertising. The 2 million for the fourth quarter is, so that’s above what we’ve planned for this year. We had originally planned, 9 million in this year, 10 million for this kind of first stage. And we’ve completed that, but we don’t want to dark in Q4, because it takes a while to get awareness to take some repetition. And so we are planning to continue that a lower level and Q4 was about $2 million spend. Figure out, how to first change the campaign and kind of take it to the next level if you would. And then start again in fiscal ’07.

Q - Manny Recarey

Okay and ramp sign of it, the ramp that backup this spending overall in the…

A - Barbara Scherer

Quite close to 20 million yeah.

Q - Manny Recarey

To 20 million, okay, and then the, talk about some synergies between ACG and AEG, the, do you have any plans or can some of the distributions that you use for ACG, sell some of the AEG products, that happening now, is that something that could happen?

A - Ken Kannappan

Yes where those segments overlap and those would be principally segment such as in the mobile space where you are now seeing the convergence of, cellular phones with audio entertainment and the forms of these mp3. Cell phones which, it’s clearly embryonic state, they perhaps that are fully growing in popularity with some of the new model.

Q - Manny Recarey

And that something that would be happening in the futures, it doesn’t happen, its not happening to us yet?

A - Ken Kannappan

Well actually there is some happening now and we are certainly hoping for more in the future.

Q - Manny Recarey

Okay thanks.

A - Barbara Scherer

Thank you.

Operator

Your next question comes from the line of Daniel Moon with Citigroup.

Q - Daniel Moon

Hello, congratulations guys.

A - Ken Kannappan

Thanks.

Q - Daniel Moon

Few questions first on the Altec Lansing business can I know you said, you couldn’t talk about the specific attach rate. But, can you talk about the directionally is it moving higher and if you think it is moving higher than what would be the factors behind that? Further for the iPod speakers.

A - Ken Kannappan

Yeah, I do not I do not I don’t recall being trend data that shows that is moving up significantly higher someone have to get back to on that. But I think that the, the general trend of people to accessorize their iPods as they can root and is having increasing focus on the part of the retailers as well as on the part of everybody involved in the eco system. We are trying to create a more complete experience for the consumer. And so, I think that with that trend is got in pretty well established already and so that the largest growth I think has been driven by the growth with category itself rather than that the, speaker segment in particular is having, we are having the significant increase in the attach rate in the December, quarter. But if we look over a longer time period, then there has been increase in the attach rate specific speakers.

Q - Daniel Moon

Okay and then moving on to the office and contact center business. If I look back, typically, you’ve seen a decent up tick in the March quarter, just because it, it seems like its because of the, a fiscal yearend. Now, quarterly the Cordless Office Headsets will grow but, if I look over the last three quarters the corded business has been flat to down slightly. Is there any reason that could actually pick up in the March quarter, just because it again the fiscal yearend?

A - Barbara Scherer

It’s a good point and historically you are right that the professional great corded headset business usually was up sequentially in the March quarter and the March quarter would kind of set the pace, for the rest of the quarters for the year.

Q - Daniel Moon

Right.

A - Barbara Scherer

And not that was, I would say a pretty established pattern over maybe a decade or more, but I do also think there are lot of things, have changed with because some of the office market, is clearly buying Wireless product and I think a greater percentage of our corded products go into the contact center probably when they did, 5 years ago, when at least when a bigger portion was going into the office market. So, I think it’s little harder for us to estimate and it is tend to be something that we don’t count on any of that because if, for long, it could make a difference in terms of their earnings. So that’s one that we tend to think of more as, flat growing slightly.

Q - Daniel Moon

Great, I guess my question, some companies typically give their sales people, a bigger incentive to close out the year with the banks sort of speak?

A - Barbara Scherer

No we don’t do that at all.

Q - Daniel Moon

You don’t do that okay.

A - Barbara Scherer

Do that at all.

Q - Daniel Moon

Got it and then my last question…

A - Barbara Scherer

We try to do quite the opposite and just pay on, sell-through and that type of thing.

Q - Daniel Moon

Okay. Then my last question again so professional corded was up sequentially this quarter, can you talk about how much of that was volume versus pricing?

A - Barbara Scherer

There really is no difference and pricing so we’d translate to volume.

Q - Daniel Moon

Okay, got it okay thank you very much.

Operator

We have a follow up question from the line of John Bright from Avondale Partners.

Q - John Bright

Thank you, Barbara can you here me?

A - Barbara Scherer

Yeah we can.

Q - John Bright

Okay terrific wanted to come back quickly visit, the, our manufacturing cost on the Audio Communications Group gross margins, can you give me an idea of what steps are you taking to lower some of this higher manufacturing costs?

A - Ken Kannappan

Sure, I’ll give you a few. First of all, of course, we have always devoted effort to component cost production and to manufacturing engineering and some of the times those are longer cycle project because we are meeting to do some redesign of the product, we needed to do some qualification of particular components and so there is a variety of reasons that can represent greater cycle. But we have a fairly significant effort there right now. I think we have fairly significant opportunity there across some number of our Wireless products what we’ve really, are early in the types of silicon solutions we are using relative to what we think we can build. A second thing is really in terms of design for manufacturing, we, I think entered to world wire for the first time; we have some real cutting edge designs that are winning these awards. And at the same time, that is slightly immature process from our standpoint in terms of doing that effectively from a customer standpoint and also doing it effectively from a, the cost standpoint and from a, ease of manufacturing yield standpoint. So that’s a learning curve that we are trying to move down, will hit a price still take this for a while but we are certainly trying to make progress in moving down that curve. Obviously, I won’t reiterate any of the things with the China plant. Because it’s probably speaks for itself. But certainly we are hoping it and expecting to get, better cost there.

Q - John Bright

How would you rank those in terms of the importance or in terms of magnitude, design to manufacturing the component side of the equation in China Plant?

A - Ken Kannappan

Well, I mean I think that are crucial and by the way I’d mention one more which is, how effective through the platform products which can lower our tooling and testing and another costs as well as producing cycle tend to market, I probably have to say that the, the product cost itself with the single largest item, but I haven’t said that on a, on an ongoing sustaining basis its probably more, the, as the platforming than anything else.

Q - John Bright

Okay, and two final ones, one clean, if I could Barbara on the American Jobs Creation Act, you’ve valuated that potential to repatriate some cash and you decided not to do that, is there any tax impact associated with that going forward?

A - Barbara Scherer

No, there would have been if we had decided to do it, but we actually concluded that it, it didn’t, it wasn’t, it firmly compelling for us, and so there won’t be any.

Q - John Bright

And then, lastly as I looking to 2006 from a calendar standpoint, the two large trends out there one, certainly Voiceover IP adoption particularly, on the residential basis?

A - Ken Kannappan

I didn’t get the adoption what’s the adoption?

A - Barbara Scherer

Voice-over-IP adoption and…

A - Ken Kannappan

Okay I am sorry.

A - Barbara Scherer

On residential…

A - Ken Kannappan

Okay I am sorry.

Q - John Bright

On the residential side and in your strategic path, as for as a new product introduction to focus on that market and then secondly of course, we’re expecting two new gaming consoles in 2006. As well as Xbox ramping, is that something you look at more as potential upside or catalyst potential and maybe we might see another cabling tool?

A - Ken Kannappan

Okay so first on the, on the VoIP side actually we’re very pleased with our new product line up and I think we’re generally getting a pretty positive response to that product line up and so we think we’re well positioned there and, clearly at that market, market expands as we hope, will get some participation. Having said that, I’d like to caution people about the, the VoIP market because there is two forms of that market and I don’t know, you know this, but I just want to make sure everyone clear. In one form of the VoIP market, people are using in APA and then it’s quite invisible relative to the terminals that you are using in their home, so they can use their existing phone and they don’t have to have a headset, of course the headset, the buyers certain benefit if they don’t have to use it, when they are using their computer as a terminal that it tends to increase the attach rate for headsets in the home and also typically the free services. And obviously, just because you’re using VoIP doesn’t mean your necessarily using the free service. Relative to the gaming opportunities, we don’t see another cable or two coming having said that, candidly, when that one came we didn’t see it very far in advance either something could always come out of the blue. But the thing to remember is, in the gaming industry, you don’t have to help at this specific core of the game, so what we hope that this does represent a long-term opportunity, we also don’t expect it to be as larger portion of the total revenue opportunity in the coming year.

Q - John Bright

What about the potential on the residential side for a Wireless sensor.

A - Ken Kannappan

Well we, we are rested in the residential market and we do have a kind of a Wireless headset telephone, that we use as well as the potential for between greater use of Wireless headset with, socom Bluetooth-enabled wireless phones as well as with personal computers, so I think that there is some potential in that market although, we don’t expected again to be a significant part of our, of our revenue mix. Hello?

Operator

We have a follow up question from the line of Jason Ader with Thomas Weisel.

Q - Jason Ader

Hay guys just on the, on the taxes again, just want to make sure understand for the March quarter the, the guidance does, it includes about 1.8 million amortization charge and the fact of the tax rate. For did you not get any benefit from tax is it right?

A - Barbara Scherer

Yes it does, all its GAAP, it’s the GAAP estimation.

Q - Jason Ader

The GAAP number, okay.

A - Barbara Scherer

Yeah.

Q - Jason Ader

If I would have trying to estimate the impact from the tax, I’m not being able to deduct the taxes, I just take the 1.8 million and divide it by the share count, is that what I do?

A - Barbara Scherer

Great.

Q - Jason Ader

That’s it?

A - Barbara Scherer

Yep.

Q - Jason Ader

Okay thanks.

Operator

At this time there are no further questions.

Ken Kannappan, President and Chief Executive Officer

All right thank you very much, I would like to thank all of you for attending our call as always we’re available if you have follow up questions. Thank you again.

Operator

This concludes today’s conference call. You may now disconnect.

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